[Posted 7:00 AM ET]
The War on Terror
“There may be some who think that Britain would gain from
standing back from this struggle, even some who believe that we,
and the United States, and our allies have somehow brought this
upon ourselves. Let us be very clear. America did not attack al
Qaeda on September 11, al Qaeda attacked America, and in
doing so attacked not just America, but the way of life of all
people who believe in tolerance, and freedom, justice and
peace…
“This terrorism is the 21st century threat. It is a war that strikes
at the heart of all that we hold dear, and there is only one
response that is possible or rational: to meet their will to inflict
terror with a greater will to defeat it; to confront their philosophy
of hate with our own of tolerance and freedom; and to challenge
their desire to frighten us; divide us, unnerve us with an
unshakeable unity of purpose; to stand side by side with the
United States of America and with our other allies in the world,
to rid our world of this evil once and for all.”
–British Prime Minister Tony Blair, 11/20/03
All I have to say is thank God for Blair and Britain. Oh, sure,
there are Brits like London Mayor Ken Livingstone, who called
President George W. Bush the “greatest threat to life on this
planet that we’ve probably ever seen.” Better to focus on Blair
and the likes of Foreign Secretary Jack Straw, who said what sets
the U.S. apart “is not raw power but an awareness of
responsibility.”
But speaking of responsibility, it’s about time the Bush
administration rewarded Britain for its steadfast loyalty. Only
this week, for example, did we learn that Cheney Inc. is finally
allowing British firms to bid on Iraq reconstruction contracts.
And it took some arm-twisting from U.S. Civil Administrator
Paul Bremer to get even this far. Nothing ticks me off more,
because you’ll recall long before the war started I was urging the
administration to cut backroom deals on the energy front, for
instance, with the likes of Russia to gain their unqualified
support on both Iraq and Iran. It was Defense Secretary Donald
Rumsfeld, after all, who told us in the days immediately after
9/11 that the war on terror would be a dirty one. Basically, it
called for a return to Kissingerian diplomacy. Secret, and
something for everyone.
Alas, the administration didn’t see it this way, not even with
regards to our best friend. The heck with the rest of you, it was
saying, and we’ve paid a price since with the lack of support
we’ve seen in Iraq from many who could have helped with the
heavy lifting.
The New York Times’ Tom Friedman came up with a great
phrase this week in saying the administration needs a “policy
lobotomy” to neutralize some of our enemies. It would also help
in keeping our friends.
As for the tragic events of the past week in Istanbul, my heart
goes out to these people, and I couldn’t stop thinking of those I
have met on my trips there, like Erol, the bartender at the Hyatt
Regency where I stayed. Oh, we had some great conversations,
late into the night.
Every time Turkey starts to recover and gain a better sense of its
promise, there’s either a coup, a catastrophic earthquake, a war,
or, now, waves of terrorism that send the nation reeling
backwards. This country, founded by the great secularist
Ataturk, deserves better.
The big story that’s lost today, though, is that Turkey’s hopes of
gaining admittance into the European Union surely suffered a
deep blow. Yes, Turkey is a country that all too often shoots
itself in the foot, but this time it’s being slammed for supporting
the West and Israel. Unfortunately, there’s a history of
instability here on the political front, to say the least, and the
internal pressures within the population – 98% Muslim – to
change course will be intense. There is little we can do in the
interim, however, except observe the actions of both the military
and the new Islamist government, and pray.
Iraq
On both Iraq and the war on terror in general, I often find it
difficult to write certain things, knowing that the situation on the
ground could change in the blink of an eye. I almost have a fear
of noting anything good, such as reduced casualties for a stretch,
afraid I’m jinxing the men and women fighting the battle of good
vs. evil. As we saw last weekend, one rocket-propelled grenade
finding its mark on a Black Hawk helicopter can have
devastating consequences.
But at least for a few days the American military offensive has if
nothing else refocused attention on the real mission at hand.
Root out and kill the bastards before they get us. Yet while I
have never criticized an individual U.S. military operation, in
dropping 500-pound bombs on crowded neighborhoods I’m not
so sure that’s the best way to win the hearts and minds.
Where I have voiced my displeasure, frequently, is on the issue
of troop levels and for the life of me I still don’t understand
where some are coming from. Max Boot, for example, a brilliant
strategist, wrote this week that “we could secure borders and
arms depots but Vietnam proves more troops isn’t necessarily the
answer to defeating guerrillas.”
In other words, ‘Yeah, we could use more, I guess, but what we
need more of are the right kind,’ at least that’s a standard refrain
these days.
No, we must secure the borders and depots, first. How the hell
can we leave it to this new Iraqi security force, which clearly
hasn’t been trained enough, let alone properly vetted, to do the
job for us?
And now the U.S. is focused on turning over all political
authority to Iraqis by next July, with elections slated for 2005.
This is what the world community has demanded, and this fits
nicely into the Bush administration’s election timetable.
So there will first be 18 town councils that will then choose a
new national assembly. And next summer the new national
assembly will elect to formally invite the United States to
stay…or will they? Not unless we win the hearts and minds first.
Wall Street
“China and the U.S. appear to be on a collision course on the
trade front.”
–WIR, 11/8/03
Or as Emeril says, “Bamm!”
In this increasingly globalized, competitive world of commerce
that we live in, the last thing we need is a trade war, and the
chances of one just increased 4-fold this week. Trade is another
issue best discussed, argued over, and negotiated on behind
closed doors. Instead, today, the volume from all corners of the
globe has been turned up and it’s not healthy, sports fans.
The latest round of disputed issues goes back to the farm
subsidies that Japan, Europe and the U.S. like to ply this voting
block with. No one wants to be the first to pull them away for
fear the others won’t, leaving them high and dry come election
time. Of course the developing nations, just trying to catch a
little break, end up paying the price and another battle to win the
hearts and minds is lost.
But then last year President Bush and Smeagol (Karl Rove)
decided to slap tariffs on imported steel, an incredibly stupid
move, as I so noted at the time. No doubt, some foreign nations
were dumping their product on our markets, but this could have
been largely rectified with skillful diplomacy. Instead, the Bush
team took a look at the ’04 election map, caved into the steel
interests, and ended up hurting more American laborers and
consumers than they helped.
So this week the world began to retaliate, the U.S. slapped new
tariffs on Chinese goods, China threw a fit, and Rodney King
stepped forward to say, “People, can’t we all just get along?”
Oh, there is hope the parties will pull themselves back from the
brink, and I do think cooler heads will prevail. Despite the
conspiracy theorists out there, the World Trade Organization
works. You don’t always get everything you want, but it’s far
better than the alternative.
The U.S. has legitimate, big time beefs with China, for example,
and China must be forced to comply with the terms of its
admittance into the WTO. Commerce Secretary Don Evans’
speech in Beijing the other week was harsh, but a good one, and
China seemed to be responding. Then the U.S. felt compelled to
solidify some votes in the Carolinas by aiding a dying textile
industry and you’ve seen the tit for tat result.
Just remember something I’ve said often before. Bad
government causes depressions.
Street Bytes
–The major averages declined for a second week in a row.
Believe it or not, in the case of the Dow Jones it’s the first time
since February / March. The Dow finished off 1.4% to 9628.
Nasdaq closed off 1.9% to 1893. Dow 10000, Nasdaq 2000, and
S&P 500 1050 (now, 1035) are proving to be big resistance
levels.
And not for nothing, but the S&P traded at 1010, 1011, and 1010
on three consecutive days, June 16-18. In other words, we’ve
treaded water for the past five months.
–U.S. Treasury Yields
6-mo. 1.00% 2-yr. 1.81% 10-yr. 4.16% 30-yr. 5.01%
Terrorism, and a flight to safety, were the main reasons why
bonds had a decent week. It’s not as if the news was really that
good for either U.S. stocks or bonds, though, as the government
revealed that foreign buying of both was just a net $4 billion in
September, down sharply from $50 billion in August.
So while bonds held their own, the U.S. dollar hit an all-time low
against the euro, thanks in large part to the above item. The
issue is have we finally reached the tipping point? Is the dollar
about to roll over, after an orderly decline over the course of the
year?
If it does, it can’t be good. Consider this. Between January and
August (the latest available period), Asian holdings of U.S.
Treasuries rose another $100 billion to $745 billion. Imagine the
impact if a large portion of this is repatriated. While the dollar
and the bond market didn’t act according to the textbook this
week, nor have the two for the better part of ’03, eventually
theory and history will win out. Interest rates will rise if the
dollar continues to fall, trumping any benefit on corporate
earnings with U.S. multi-nationals.
Lastly, much has been written on the compilation of official
government statistics, such as the calculation of the consumer
price index and gross domestic product. Two weeks ago,
Brandywine portfolio manager Foster Friess was on “Wall Street
Week,” talking about how the government artificially inflates
computer sales, for example, and that by his own computation,
GDP wasn’t 7.2% in the third quarter, but more like 2%.
As for the inflation figures, key prices for goods and services we
all use continue to soar, yet the government, led by the Fed,
seemingly tells us otherwise.
In other words, the conspiracy theorists on this front do have a
point…a very good one. But I hope you understand that most of
the time I still have to deal with the facts as given us, even if
faulty.
–The 34 nations of the Western Hemisphere gathered in Miami
to try and make some headway with the Free Trade Area of the
Americas. Nothing was really accomplished, but it was
important everyone at least talked without killing each other.
Unfortunately, for the U.S. election cycle, around November of
next year is when the nations are supposed to have largely
papered over their differences, particularly between Brazil and
the U.S. I suspect they won’t have by that date.
–I watched a whistleblower on CNBC, a former stock broker
with Morgan Stanley in Philadelphia, and the guy was right on as
to the internal pressure on brokers to sell in-house, proprietary
mutual funds. I noted months ago that in my own experience in
the business, Morgan Stanley (going back to the Dean Witter
days) was the worst offender in this regard.
This week the firm was fined $50 million by the SEC for not
disclosing conflicts of interest, such as the fact that its brokers
received extra compensation (or other awards) for selling both
in-house and “preferred,” or “focus list” funds from outside
groups without clients knowing of the incentives. In return, it
was expected the fund companies would direct trading business
to Morgan Stanley.
It’s all about the fight over ‘shelf-space.’ My job at PIMCO, in
the old days, was to gain it. We had a heck of a story to tell and,
over time, I was successful (thanks in no small part to the help of
some great fellow professionals). But as the years went by,
brokerage and financial planning firms, both large and small,
demanded a piece of the pie for “renting their sales force.” In
some respects it was probably warranted, but soon it deteriorated
into a game of stick up.
It’s this last issue that the SEC and the likes of New York
Attorney General Eliot Spitzer are exploring in great detail, it
would appear. As the cases unfold, I’ll have further comment.
But back to the issue of Morgan Stanley, one of the other reasons
for the SEC action this week was the way they sold ‘B’ shares.
Folks, simply put, stay away from them. I can build a good case
for ‘C’ shares, especially for investments under $100,000, or if
you have a short time horizon, but in most cases any long-term
investor is better off in ‘A’ shares.
–Mr. Pilgrim and Mr. Baxter, of the mutual fund outfit PBHG,
were the recipients of civil charges from both the SEC and
Spitzer due to excessive short-term trading of their own funds,
among other things. In other words, these two were primo
dirtballs.
–It’s amazing how Morgan Stanley CEO Phillip Purcell skates
by with all the stuff that has gone on during his watch. Both MS
and Citigroup are being investigated for aiding and abetting
Freddie Mac as it manipulated earnings the past few years. Now
Freddie is saying it understated by $5 billion. This sounds
positive, doesn’t it? No, it means they lied…and it also means
they have no freakin’ clue what’s going on in their shop, in case
you were concerned, as I am, that a future derivatives blowup is
on the horizon.
–Energy: Crude oil soared above the $33 level, the highest since
last March, before falling back to $31.61. Aside from technical
factors, such as rolling over the contract to the next month, there
are ongoing concerns about the level of supplies this winter. But
one thing is for certain, OPEC and the other energy producers are
like whirling dervishes with prices this high, though they also
recognize it puts the global recovery in jeopardy should they
remain at these levels.
But then you have the energy bill that is working its way,
haltingly, through Congress. Of course it has little to do with
actual energy generation and decreasing U.S. dependence on
foreign oil. It’s basically a joke, as it promotes the likes of
ethanol through all kinds of credits and incentives, while
granting producers of MTBE (the harmful additive) immunity
from product liability lawsuits.
And remember the little blackout we had a few months ago?
There is little in the bill for upgrading the grid. In other words,
it’s just a giant jobs program, loaded with Jimmy Dean Pork
Sausages for each congressman and senator. It was also
embarrassing to learn this week that China will now enact stricter
fuel efficiency standards than exist in the U.S.
–The growth rate for the European Union is still only projected
to be at a 1% rate in the first quarter of 2004.
–AT&T Wireless is looking to outsource up to 3,000 jobs
overseas. Their reception is likely to be poor.
–Geezuz, those 47 currency traders that were arrested were one
sleazy group, that’s for sure. As a good friend in the investment
business told me, it’s embarrassing being associated with the
entire industry these days.
–Shares in G.E. rose early in the week thanks to a ‘managers
special’ at Merrill Lynch. This is how it works, boys and girls.
The head brass says “We need a focus stock for the day to get
our sales force calling Mr. and Mrs. Jones…find one.” Then the
head of research picks out an analyst and says, “John, I want you
to upgrade G.E.” “One upgrade coming up, sir.” “Brilliant…get
on the box and tell the brokers.”
Meanwhile, the divisional directors are conferencing with their
branch managers. “Listen, you SOBs. It’s been a light month
thus far and headquarters is all over my ass. Each office has to
sell 100,000 shares or your bonus is impacted. Now get to
work.” “Aye, aye, captain.”
Two days later G.E. said the company wouldn’t see a real
earnings turnaround until 2005. The stock, pumped up by the
upgrade, fell back to its previous level at week’s end.
–St. Paul Cos. is merging with Travelers Property and Casualty
Corp. to form the 2nd-largest commercial insurer in America
(next to AIG), which means that insurance premiums will soar
ever higher…just because, plus there’s less competition.
–40 years ago this week, the U.S. and the Common Market were
embroiled in the “chicken war,” as tariffs were placed on
American birds. The U.S., after estimating poultry losses at $26
million, retaliated by increasing tariffs on imports from market
members. In other words, another example of the more things
change, the more they stay the same.
–The CEO of media giant Hollinger International (Chicago Sun-
Times, London Daily Telegraph), Conrad Black, resigned
following allegations he, along with senior executives, scarfed up
$32 million in improper “self dealing.” As my favorite singer
Petula Clark crooned, “(It’s) A Sign of the Times.” [#11, 4/66]
–Microsoft is entering the online music market. So expect a few
gaps in the recordings you download.
–Inez June Threet, Wal-Mart’s first employee, died at age 84.
She was hired as a clerk in 1950 and retired in 1975. Since
WMT went public in 1970, I’m assuming she did alright with her
stock. I’m also assuming she wasn’t an illegal.
International Affairs
Iran: While Secretary of State Colin Powell does all he can to
avoid another U.S.-European Union clash over policy, it appears
that’s where we could be headed concerning the International
Atomic Energy Agency’s report on Iran’s non-compliance for 18
years regarding its nuclear weapons program. The IAEA has
thus far stopped short of recommending the issue be taken up
by the UN Security Council, and the U.S. once again finds itself
in a distinct minority favoring harsher treatment. In fact, on a
vote of 35 members of the IAEA for formal censure of Iran, only
3 joined the U.S. in taking this path…Australia, Canada, and
Japan. Britain, France and Germany were among those saying
‘no.’
All of us hope this pending disaster can be worked out
diplomatically, but it’s inconceivable that Europe can’t
understand the threat to its own people. But then as I wrote
earlier, this is another case where a little diplomacy in smoke-
filled rooms, before we launched the war in Iraq, would have
borne fruit here as well.
Russia: Boy, there are some dumb editorials being written these
days, such as the one by Paul Klebnikov, a senior editor at
Forbes, that found its way into the Wall Street Journal.
Klebnikov wrote that it was a good sign, not bad, that former
Yukos chairman Mikhail Khodorkovsky was arrested because it
strengthened the foundation for Russian property rights.
Klebnikov, like other apologists, then said nothing about
President Vladimir Putin’s KGB cronies occupying the highest
reaches of the Kremlin, nor about the systematic recreation of the
Soviet empire that Putin seems hell-bent on completing, nor
Chechnya, nor anti-Semitism.
But, in the interest of full and fair disclosure, U.S. News reported
in its “Washington Whispers” column that Khodorkovsky was
caught on tape earlier this year in a discussion with Russian
Communist Party officials, offering to financially support its
anti-government plan. According to the piece, Putin then
confronted Mr. K. about it, Khodorkovsky denied it, and a few
days later Putin had him arrested. [I’m not buying the story, yet.]
So we sit back and see what happens next as the now critically
important December 7 parliamentary elections rush forward like
a train across the frozen tundra of Siberia.
Back to Yukos and Russia’s energy sector, the former is trading
at about $44, off its high of $68.50 around the time of the
Khodorkovsky arrest. And if you’re an investor, thinking the
worst is over for Russian oil plays in general, be careful.
Defense Minister Sergei Ivanov, who never sticks his neck into
economic matters, suggested there should be more state control
of the oil industry, i.e., he wouldn’t have said this without Putin’s
approval beforehand. Wonder what Klebnikov would say about
this?
China / Taiwan: The central government in Beijing felt
compelled to issue its stiffest warning in years against the
independence movement of Taiwan’s President Chen Shui-bian,
threatening all out war. Chen said a referendum on
independence should be held 12/10/06, with implementation of a
new constitution in 2008. [First, there’s the presidential election
next spring…which is why this issue is such a big deal now.]
Israel: Prime Minister Sharon and Palestinian Prime Minister
Qureia are slated to meet soon. 2 Israeli soldiers were killed by a
Palestinian hiding a gun in a prayer rug.
France: Related to the above, and in keeping with President
Bush’s demand that European leaders address the growing anti-
Semitism on the continent, French President Jacques Chirac met
with his cabinet and declared, “Attacking a Jew in France is an
attack on all of France.” This may not seem like much to some
in the U.S. in particular, but given France’s history it is. I still
hold out hope that before he exits the national stage, Chirac will
do something good.
Serbia: Talk about flying under the radar, for the 3rd straight
time the vote for president was invalidated due to the fact that
less than 50% turned out. This is a real crisis, and even more so
because of those who did vote, an extremist with ties to
Milosevic was first. One shouldn’t be surprised to see the
Balkans back in the headlines next year.
Pakistan: President Musharraf banned 3 militant / terrorist
groups, but he’s done this before and the outfits simply re-
emerge under different names.
But let’s face it – and I apologize for being so harsh – a single
bullet, taking out Musharraf, would change the entire global
dynamic within minutes. For all his faults, and his ongoing high-
wire act, he is probably the only force standing between non-
nuclear stability and catastrophe.
South Korea: I have been critical of Secretary of Defense
Rumsfeld for his post-war Iraq and Afghanistan policy, but I
totally agree with his moves to redeploy the 37,000 U.S. troops
stationed in South Korea, away from the DMZ where they are
sitting ducks. And in a visit to Seoul this week, Rumsfeld made
it clear the U.S. would go nuclear to defend the South, a
comment specifically for consumption in Pyongyang.
Canada: Prime Minister Chretien is leaving on December 12.
Enter Paul Martin and a hoped for new era in U.S.-Canadian
relations; one free of trade spats, for starters, as well as intense
cooperation in tracking down terrorists of all stripes.
Random Musings
–President Bush’s trip to Britain appeared to be a big success.
The protesters, on the other hand, were big losers.
–The latest USA Today / CNN / Gallup poll had some
interesting findings. President Bush’s support among women has
fallen from 53 to 44 percent in just one month, while among both
sexes 6 in 10 say he’s not in touch with the needs of ordinary
Americans, though 7 in 10 still like him as a person, and in the
end this last figure wins elections.
When it comes to Iraq, 55% disapprove of the administration’s
post-combat management, but as in other polls over the past few
months, a majority support having gone to war in the first place,
while another majority wants U.S. troops out in a year. It’s this
conflicted view that Americans must resolve.
But let’s face it, 2004 is going to be an absolutely tumultuous
year. The election, the war in Iraq, al Qaeda, Afghanistan, trade,
Israel, Russia’s presidential election, of course the economy, and,
yes, even the issue of gay marriage….just for starters.
–One of my chief frustrations is with the soaring rhetoric of
President Bush and other Western leaders on issues such as
Burma and Zimbabwe, with the West then doing nothing. On
one hand you can say, well, Burma and Zimbabwe’s neighbors
are useless on this front, too, but the U.S. has to lead and where I
have a real problem is that in both cases, elected opposition
leaders are already in place, denied the right to govern through
both election fraud and thuggery. This isn’t nation-building, it’s
just giving the people what they themselves seek.
In Zimbabwe, Robert Mugabe should be taken out by force.
Burma, however, is different, and the government needs to be
strangled with sanctions. On this China must cooperate.
–Since 1977, the FBI has linked 1,000 criminal acts, resulting in
damage of $100 million, to environmental and animal rights
extremists. Add them to the list for 2004. [New York Times]
–So Homer Simpson once again has fallen into bankruptcy and
he goes to the bank to withdraw his last funds.
Manager: “Ah sir, your life savings…”
Homer: “Hmm…I see it’s in bill form…excellent.”
–Americans eat 14 billion hamburgers a year. Ranchers today
are receiving about $0.90-$1.15 a pound for their cattle, 30-40
cents more than a year ago.
–Well, let’s face it. Between Michael Jackson, Scott Peterson
and Kobe Bryant, the talk shows have ample material for the
next year or so. But don’t look for much coverage here.
–I finally viewed “The Two Towers” (2nd installment of “Lord
of the Rings”). Bring on “Return of the King,” coming soon to a
theatre near you.
–Note to my friends in Taipei. Why you are building the
world’s tallest structure in one of the world’s prime earthquake
zones I’ll never know. And it was on television in the States that
the building was shedding some of its skin this week. This has
ominous overtones.
–Every quarter or so I plug my name into some of the search
engines to see where I may be linked and the other day I saw
StocksandNews on one particular site, with just one other link,
for the “antichrist.” Yikes! I didn’t click on that one. I was
afraid to.
–My brother and I both agreed that the JFK special with Peter
Jennings on Thursday was a great piece of reporting and it’s a
shame that every American didn’t see it. For starters, Jennings
tore holes into Oliver Stone’s “JFK.” Separately, if you want to
read a good piece on the assassination check out our own “Dr.
Bortrum.”
–Finally, I figured it out. Michael Jackson’s mug shot reminds
me of a Gauguin, during the artist’s troubled Tahiti phase.
—
God bless the men and women of our armed forces.
God bless America.
—
Gold closed at $396
Oil, $31.61
Returns for the week 11/17-11/21
Dow Jones -1.4% [9628]
S&P 500 -1.4% [1035]
S&P MidCap -1.6%
Russell 2000 -1.3%
Nasdaq -1.9% [1893]
Returns for the period 1/1/03-11/21/03
Dow Jones +15.4%
S&P 500 +17.7%
S&P MidCap +27.6%
Russell 2000 +37.3%
Nasdaq +41.8%
Bulls 57.3
Bears 20.4 [Source: Chartcraft…like I said last week, these
numbers have been stagnant]
Have a blessed Thanksgiving.
Brian Trumbore
